How financial crises can affect the value of cryptocurrency

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08.11.2021 10:30
 How financial crises can affect the value of cryptocurrency

    The last of the major financial and economic crises occurred in 2008. However, its echoes continue to haunt the global economy. Although governments have made certain conclusions, they are in no hurry to revise the rules by which the world economy and finances operate.

    The crisis of 2008 is instructive in many ways. It all started with the mortgage market and ended in the largest recession in history. The Fed (Federal Reserve System) and other central banks tried to save the situation and loosen monetary policy by lowering rates and launching programs to buy securities from commercial banks, which contributed to a partial recovery. However, the measures taken have led to the appearance of financial bubbles in different markets, which also had its negative consequences in the future.

     

    The consequences of the Great Recession in lay terms

    An economic downfall is always serious. The effects of the crisis were very widespread. And to understand them, suffice it to note that more than 8 million people in the U.S. lost their jobs. More than two million companies found themselves on the brink of bankruptcy or ceased to exist. And that's not the half of the story. The mortgage and economic crisis have caused Americans to lose their homes as well as their faith in the existing system.

    Many economic indicators, despite the diligent work of the Fed and other central banks, could not reach their pre-crisis levels for long enough and this despite the fact that banks were again taking risks by providing loans, and the Fed encouraged them to do so. That is, the system was again pushing itself to the brink of survival by its own actions. Instead of making global changes, central banks tried to 'put out the fires’, or in other words took spot measures aimed not at preventing similar events in the future, but at getting rid of the consequences of what had already happened.

    According to regulators, the global financial system has already undergone significant changes since 2008. Serious safety measures have been taken (e.g. measures aimed at improving credit scoring) to minimize the risks of such crises recurring in the future. However, none of the steps taken guarantee that we won't end up where we were in 2007 in the near future.  That is, when the situation was already beginning to spiral out of control, and the bankruptcy of one of the largest banks in the United States triggered a veritable financial tsunami.

    Was the emergence of cryptocurrencies accidental?

    In fact, there is a close correlation between the events of 2008-2009 and the emergence of the first cryptocurrency. Satoshi Nakamoto believed that cryptocurrency is not just a way of encrypted information transfer. It is a kind of revolution in the world of finance, the emergence of independent money, the rate of which would not be influenced by central banks.

    In part, that makes sense. Today any central bank, even with democratic market regulation, can bring down the exchange rate of its fiat currency. All it takes is to lower rates or start buying securities from commercial banks, increasing the supply of fiat money.

    And making the currency cheaper is good for the economy on the one hand. It encourages people to spend more money.It encourages business activity. However, inflation reduces consumer income.  With each turn of inflation, a household can afford fewer and fewer goods and services for the same amount. 

    Professional financial market participants save themselves by investing their money in securities and other assets. In times of crisis, many of them got even richer, while ordinary consumers only lost.

    Therefore, the emergence of bitcoin was no accident. Despite the fact that almost nobody took the idea of the first cryptocurrency seriously and for a long time it was mainly used by geeks and enthusiasts, closer to the end of the 2010s, the situation has dramatically changed.

    Cryptocurrency became a full-fledged participant in the portfolios of many experienced financial market participants. And in the early 2020s, it attracted the attention of the world's leading entrepreneurs, such as Elon Musk, for example.

     

    What is the secret of bitcoin's appeal?

    As long as bitcoin has been in the shadow of fiat currencies as well as other assets, few people have thought about its attractiveness. Although all of this has been described in the project's White Paper from the very beginning. And the first thing to think about is the limited issuance. The maximum amount of BTC cannot exceed 21 million units. And this fact itself makes bitcoin a more attractive way to save, because in the long term limited emission will increase demand for the cryptocurrency and, consequently, its value.

    Limiting the maximum emission in the long run contributes to the fact that demand will in any case exceed supply. This kind of inflationary model contributes to an increase in the price of bitcoin relative to any existing currency.

    And that's not the only reason cryptocurrencies are attractive.

     

    Peer-to-peer transactions

    The ability to conduct fast peer-to-peer transactions (transactions between users directly), bypassing banks or other intermediaries. Outside the blockchain environment, it is possible to transfer money to another person, if at a distance, either through a bank or through electronic payment systems (with intermediaries in both cases).

    Positive stories.

    They are one of the driving forces behind the progress of this industry. Every now and then there are reports in the press about how someone bought cryptocurrency cheaply and then sold it dearly. All this affects people in much the same way as stories from those who won in the casino or the lottery.

    There is a well-known case where a user bought a pizza for 10,000 bitcoins. This story traveled around the world and became one of the drivers of interest in BTC, as well as other coins. Potential depositors imagine how much they could buy today for such an amount and buy bitcoins in the expectation that their price will grow ten times more.

    By the way, many analysts predict the next round of growth very soon. If some time ago the price of $20,000 per 1 BTC puzzled many people and seemed fantastic, today's forecasts of $150,000 do not seem to be out of the ordinary. On the contrary, many expect that this figure will not become a limit. 

    And all this against the background of the fact that the world economy is under dire pressure of the pandemic and its consequences, and central banks of the largest countries continue to keep key rates at 0%.

     

    Prospects for cryptocurrency

    Despite the boom in cryptocurrencies in the past few years, this field is still considered relatively young. Its capitalization reaches only a few trillion dollars. It sounds quite weighty, but compared to the stock markets, cryptocurrencies have room to develop and grow.

    1. Technological perspectives. Bitcoin is not just an electronic currency. There is a whole technology behind it that has already caused a bit of a revolution. Blockchain has captured the minds of not only enthusiasts, but the heads of many large companies, as well as banks. Today, developments are underway aimed at creating digital currencies analogous to the ruble, US dollar, yuan, and so on.
    2. Time proved technology. Blockchain has been around for over 10 years, which also increases the level of confidence in it. At the beginning of 2010 bitcoin was interesting mainly for enthusiasts, and blockchain was something exotic for technological companies. Today, many developers are working in this very field, thus increasing the circle of those who actively use a distributed register.
    3. Large investors. A factor that speaks about the growth of trust in technology is the fact that a lot of money comes here. At the beginning of 2021 bitcoin grew significantly only because the first cryptocurrency was mentioned by Elon Musk in his posts. The U.S. entrepreneur is known to have invested some money in the first cryptocurrency. This significantly increased the demand for BTC.
    4. Central bank policies. The period of low interest rates, which has been going on for a long time, spurs to look for new areas of investment. Fiat money is no longer a guarantee for regular households. Since an ordinary consumer does not understand the stock markets and cannot analyze trends at the level of professional investors, the only thing left is to succumb to the general wave and buy cryptocurrency in the expectation of its rapid growth.

    In short, trust in cryptocurrencies is growing for the following reasons:

    1. The technology has proven to be ‘vitality’.
    2. Significant investments in the cryptocurrency industry.
    3. Interest from big business and governments.
    4. 'Ultra-soft' (low interest rates, bond purchase programs from commercial banks) monetary policy, which has been going on for more than one year.

    What factors affect cryptocurrency rates

    Before investing in a particular token, it is necessary to clearly understand which drivers can lead to an increase or decrease in rates. They can be divided into two groups:

    1. Internal. Related to project activity. For example, if a token or technology as a whole is successful, interest in the project will grow and cause the coin to rise.
    2. External. They are related to the situation in the world economy.

    Let's consider both factors in more detail.

    Internal factors

    As in the evaluation of shares on the stock market, a potential buyer of a cryptocurrency is recommended to pay attention to the project. First of all, read the latest news and how the team works and what they plan to do in the future.

    If the news feed of the project is empty, it indicates that it is unlikely that in the near future you can expect a rise in the value of the coin. In addition, it makes one think that the development of the project may be on hold.

    Any positive news about the project can be a catalyst for the growth of the cryptocurrency:

    1. A new sphere of implementation.
    2. Reaching another point on the roadmap.
    3. Launch of the test environment.
    4. Transition from beta to full version.

    In addition, experienced depositors pay attention to the mood in the community. In the world of fiat money, the average consumer has no influence on the issuer.  In the cryptocurrency community, many projects are built on the principle of voting, and teams take into account the wishes of users. Community sentiment can play a large role in shaping the market rate of a token.

    Security issues also have an important impact on rate formation. The more secure a project is in terms of protecting users and their tokens, the greater the interest in it.

    External factors

    There is a whole list of things that can affect the value of a particular cryptocurrency:

    1. Global economy. Financial crises, low interest rates, recession - all this has a positive effect on interest in cryptocurrencies and leads to an increase in their value.
    2. Politics. Risks associated with it lead to increased interest in cryptocurrencies. Revolutions, the arrival of a new government - all this can affect the value of tokens. 
    3. Technological progress. The digitalization of everything around us gradually leads to the idea that blockchain in the future will be one of the main technologies in the regulation of relations, as well as in management of ‘smart' cities. Eventually, the widespread use of the technology will lead to an increased demand for tokens.
    4. Adoption by states. Digital money only has official status in only a few states so far. As governments pass laws that allow cryptocurrencies to get their official status, interest in them grows. This leads to an increase in the number of transactions and, consequently, affects the exchange rate.

    Regulation and prohibitions as a negative influence

    Despite all the promise of the technology, not all countries positively assess the impact of cryptocurrency on the economy. Therefore, in some states, settlements with digital assets are restricted. For example, in Russia from 2021, users can own cryptocurrency. However, it is not allowed to pay for goods or services. 

    China is actively cracking down on bitcoin. In this country, new prohibitive measures aimed at protecting local fiat currency keep appearing. For example, in 2021, the Celestial Empire banned mining. However, this had no effect on the functioning of blockchains, as local miners had already moved their farms to other regions before that.

    Recently, news about bans has no longer had such a negative impact on the cryptocurrency market as before. The fact is that depositors have gradually adapted to them and see that not a single negative law has led to the fact that the technology stopped working and cryptocurrencies went out of circulation. On the contrary, it is attracting more and more attention from potential users of digital money.

    Is it possible to ban bitcoin?

    Is it even possible to ban, for example, bitcoin and make its blockchain no longer work? In theory, yes, but practice shows that distributed ledger technology can handle almost any prohibition. The blockchain has no single central server. Accordingly, you can't just walk in and take away equipment to shut down the entire network.

    Seeing this, many governments are striving not to ban, but to begin to control the circulation of cryptocurrency. For example, bitcoin and altcoins received the status of digital money in a number of states. In other countries, they have become electronic assets. Gradually, tax legislation is being applied to them.

     

    Central banks vs. bitcoin: what the world's largest bankers are afraid of

    Central banks are much less enthusiastic about bitcoin and any digital money. This is true for both the Russian Federation and the U.S., for example. More and more often, you hear the heads of central banks saying that digital currencies are dangerous, and they can cause harm. How is this expressed?

    One of the mandates of the central bank is to grow the economy. At the moment, Central Bank of Russia has the tools to stimulate economic progress in difficult situations and to keep inflation in check when necessary.

    The crisis of 2008 is exactly what forced many of the largest central banks to start using such tools. Rates were gradually lowered, and quantitative easing programs were introduced. All of this allowed the Central Bank to stimulate the economy and have a positive effect on growth.

    The reduction of interest rates to low levels, including 0, leads to the fact that deposits become unprofitable, inflation begins to rise, and the consumer is as if squeezed in this vise. It is not profitable for him to keep fiat money in the bank, and it pushes him to spend more. 

    Low interest rates are also an opportunity to issue loans. All this also leads to increased business activity.

    Digital currencies deprive the Central Bank of its main tool. That is, for central banks, the risks from cryptocurrencies lie much deeper than you might imagine at first glance. In fact, they are losing their main tool and in the long run will not be able to manage economic growth the way they did in the past. 

    How financial crises affect the value of cryptocurrency: prospects

    So, with the advent of new digital money, the situation has changed. As bitcoin and altcoins become more popular, more and more professional financial market participants pay attention to them. This means that in future financial and economic crises, the role of tokens will be more significant. Interest in them will increase, as digital coins will become one of the safe-haven assets for depositors. 

    Most likely, during recessions, bitcoins and altcoins will become one of the risk hedging (insurance) instruments. That is, they will share the role of a refuge with real gold and other precious metals. 

    In terms of economic stability times, cryptocurrencies are likely to remain attractive.  Tokens are not only a relatively safe asset. It is also a technology whose development is of interest to a growing number of people.

     

    Financial crises and cryptocurrencies: what makes investing in them attractive to the consumer

    There are several reasons why investing in bitcoin or altcoins presents certain prospects for users. Here are some of them:

    1. Cryptocurrencies have a rather large range of price fluctuations. On the one hand, this is a disadvantage, as it increases the risks of significant price drawdowns. On the other hand, if a depositor does not promptly close positions, he can make significant profits in the long run.
    2. High profitability. This is another reason why this type of asset has been receiving a lot of attention lately. Many digital currencies have seen more than 1,000% growth in less than 10 years. Securities and other traditional assets cannot boast of such returns.
    3. Promising Technology. Digital assets are not just an analogue of money. Behind them lies a whole layer of technology, the potential of which has not yet been fully disclosed or fully understood. One thing is clear - blockchain technology could be one of the turning points in transforming political and social life in the future.
    4. Cost optimization. With this technology, the number of intermediaries involved in transactions and at different stages of cooperation can be reduced. This will lead to optimization of business processes and costs. The time for transactions will be significantly reduced. All this applies equally to transactions within the network. Bank transfers take up to 7 days while transactions within the blockchain are carried out in minutes or hours, depending on the load on the network.
    5. Growth of trust. The policies of central banks during the 2008 crisis and the subsequent struggle to recover have led to a greater public trust in digital assets than in fiat currencies. Although bitcoin is not known for its price stability either, it has generally shown growth, occasionally renewing its historical highs. And if you look at almost any fiat currency, it gets cheaper over time and does not return to its past values. That is, today you can buy thousands times more goods and services with one bitcoin than you could do at the moment of its inception. At the same time, one dollar today can buy much less than, for example, 20 years ago.
    6. Bitcoin, like many other cryptocurrencies, has an inflationary model. Total emission is limited. Accordingly, over time, the demand for this and other tokens will exceed supply, which will lead to further rise in price.

    Risks of investing in cryptocurrencies

    Despite the large number of advantages, there are certain risks of investing. 

    1. Lack of regulation. Many platforms for investing in tokens are not registered and are not regulated by anyone, which increases the risks of fraudulent actions on their part.
    2. Reliability. After the hack of the MTGox website, which ended with the largest theft of tokens at the time, the security of the storage of funds on the platform plays a significant role. Unfortunately, most modern sites do not offer increased security measures, which still leads to hacks.
    3. Fraudulent projects. Between 2017 and 2018, the number of ICOs exceeded 1,000. About 90% of them turned out to be either non-viable or blatantly fraudulent with the sole purpose of collecting cryptocurrency from depositors.

    Therefore, the main task in this case is to be able to determine how promising this or that project is, as well as try to understand whether the team really fulfills its obligations or not.

    The risks associated with buying tokens can be significantly reduced by the right choice of platform.

    JOIN BROEX

     

    Broex: a platform for buying, storing and investing in digital assets

    The platform offers its clients a simple and convenient interface for buying bitcoin and over 600 altcoins. All this is made possible by a strategic partnership between Broex and Binance. Users of Broex.io can send a request to the administration to add new coins available on the advanced Binance platform.

    In addition to transactions to buy and sell digital currency, there are five options available on Broex to invest in ready strategies. And some of them are designed for beginners. These strategies have pre-defined tokens that will be bought for the portfolio. There are also options for experienced investors, where they will be able to choose digital assets on their own.

    Broex is registered in the European Union and has a license for financial operations. This shows that the platform is reliable. For the consumer, the fact that Broex is a legal entity is an additional guarantee and protection.

    Security when working with cryptocurrency is the primary task of the platform's administration. Therefore, tokens are stored here on servers disconnected from the Internet. During the operation of the platform, which is several years, there have been no cases of losing tokens due to hacker attacks.

    As for the fiat currency, it is on a separate loop. There is no access to the administration, which also indicates a high level of security.

    Broex uses all the advanced technology that allows the platform to provide quality services with minimal commissions. So if you want to buy tokens during the financial crisis or just to build a portfolio, you will be offered the best conditions and the highest level of security.

     

    Benefits of Broex cryptocurrency platform

    The pluses of the site include:

    1. Large selection of assets.
    2. Registration and license of the European Union.
    3. Simple registration procedure and fast verification.
    4. Low fees.
    5. Automated strategies for portfolio investments.
    6. Reliable wallet for storing tokens.

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